<PAGE>
THE GNMA FUND INVESTMENT
ACCUMULATION PROGRAM, INC.
LOGO
ANNUAL REPORT
DECEMBER 31, 1998
<PAGE>
To Our Shareholders:
We are pleased to present the shareholder report for The GNMA Fund
Investment Accumulation Program, Inc. for the year ended December 31, 1998.
During the year, the Program generated net investment income of 6.29% as a
percentage of average net assets and paid dividends of $1.36 per share.
During the year, interest rates on 30 year Treasury securities fluctuated
from a high of over 6% in April to a low of below 5% in October. GNMA current
coupons purchased for the Program fluctuated from a low of 6.00% to a high of
7.00%. While principal pay downs of the GNMA pools held in the Program averaged
$3.2 million per month during the first six months of the year, pay downs
accelerated slightly to $3.7 million per month during the second six months of
the year. Purchases of Program shares averaged $2.5 million per month and
redemptions averaged $2.7 million per month.
Cash balances available and reserved for the purchase of GNMAs on their
corresponding settlement dates were invested in Short Term Treasury Bills. This
contributed $79,445 of income to the Program.
This Program should continue to provide a good means of compounding
distributions from your unit trust holdings through its monthly dividend, and
barring any dramatic change in interest rates should provide investors with
attractive returns in the future.
Many computer systems use only two digits to designate years and may not be
able to distinguish the year 2000 from the year 1900 (often called the 'Year
2000 Problem'). The Program could be adversely affected if the computer systems
used by the Program Agent, the Administrators or its other service providers do
not properly address this problem by January 1, 2000. The Program's Board of
Directors is monitoring actions taken and planned to address this problem before
then, and does not anticipate that services to the Program will be adversely
affected. The service providers have told the Program's officers that they also
expect to resolve the Year 2000 Problem, and these officers will continue to
monitor the situation as January 1, 2000 approaches. However, if the problem has
not been fully addressed, the Program could be adversely affected. The Year 2000
Problem could also have a negative impact on servicing the mortgages and
mortgage pools that generate the Program's income, and this could affect the
Program's investment returns.
Thank you for including Defined Asset Funds and The GNMA Fund Investment
Accumulation Program, Inc. among your investment portfolio.
Officers and Directors Sincerely,
Michael J. Perini-President and Director
Leonard I. Shankman-Director
Robert A. Kavesh-Director
Philip G. Milot-Vice President
Teresa A. Koncick-Secretary
Gerard J. Fenerty-Treasurer Michael J. Perini
President
Custodian and Transfer Agent
The Bank of New York
P.O. Box 974 Wall Street Station
New York, N.Y. 10268-0974
3
<PAGE>
- --------------------------------------------------------------------------------
THE GNMA FUND INVESTMENT ACCUMULATION PROGRAM, INC.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INTEREST VALUE (NOTE
SECURITY DESCRIPTION RATE RANGE OF MATURITIES FACE AMOUNT* COST* 1A)
- ------------------------------------------- ----------- ------------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Government National Mortgage Association,
Modified Pass-Through Mortgage-Backed
Securities 6.00% 10/15/28-12/15/28 $ 11,521,652 $ 11,452,308 $ 11,431,667
Government National Mortgage Association,
Modified Pass-Through Mortgage-Backed
Securities 6.50 05/15/23-09/15/28 41,240,772 41,347,302 41,691,946
Government National Mortgage Association,
Modified Pass-Through Mortgage-Backed
Securities 7.00 03/15/22-03/15/28 67,955,550 68,534,240 69,590,560
Government National Mortgage Association,
Modified Pass-Through Mortgage-Backed
Securities 7.50 02/15/22-07/15/27 29,039,251 29,305,924 29,974,025
Government National Mortgage Association,
Modified Pass-Through Mortgage-Backed
Securities 8.00 03/15/17-11/15/26 15,394,105 15,506,399 16,009,869
Government National Mortgage Association,
Modified Pass-Through Mortgage-Backed
Securities 8.50 06/15/16-05/15/25 8,030,835 8,122,276 8,522,724
Government National Mortgage Association,
Modified Pass-Through Mortgage-Backed
Securities 9.00 04/15/16-10/15/21 4,983,295 4,993,999 5,322,782
Government National Mortgage Association,
Modified Pass-Through Mortgage-Backed
Securities 9.50 10/15/09-11/15/20 4,972,716 4,975,192 5,372,090
Government National Mortgage Association,
Modified Pass-Through Mortgage-Backed
Securities 10.00 10/15/15-06/15/18 2,990,336 3,001,986 3,267,878
Government National Mortgage Association,
Modified Pass-Through Mortgage-Backed
Securities 11.50 04/15/13-12/15/15 1,481,577 1,454,404 1,666,312
Government National Mortgage Association,
Modified Pass-Through Mortgage-Backed
Securities 12.00 02/15/13-11/15/15 762,101 767,074 867,605
Government National Mortgage Association,
Modified Pass-Through Mortgage-Backed
Securities 13.00 04/15/13 19,551 19,969 22,704
Government National Mortgage Association,
Modified Pass-Through Mortgage-Backed
Securities 13.50 05/15/11 10,707 10,132 12,461
Government National Mortgage Association,
Modified Pass-Through Mortgage-Backed
Securities 14.50 04/15/13 19,021 19,666 22,350
Government National Mortgage Association,
Modified Pass-Through Mortgage-Backed
Securities 15.00 06/15/13 105,181 109,562 124,245
Government National Mortgage Association,
Modified Pass-Through Mortgage-Backed
Securities 16.00 12/15/11-04/15/12 130,022 134,404 154,563
Government National Mortgage Association,
Modified Pass-Through Mortgage-Backed
Securities 17.00 10/15/11-01/15/12 531,073 558,371 635,296
-------------- -------------- --------------
$ 189,187,745 $ 190,313,208**$ 194,689,077
Total Investments--97%.......................................................
--------------
-------------- --------------
--------------
5,704,651
Other Assets in Excess of Liabilities--3%....................................................................
--------------
Net Assets--Equivalent to $21.09 net asset value per share on 9,501,665 shares of capital stock
$ 200,393,728
outstanding--100%............................................................................................
--------------
--------------
</TABLE>
* Original face amounts and related costs are reduced by principal payment
pass-throughs.
** Aggregate cost for Federal tax purposes.
See Notes to Financial Statements.
4
<PAGE>
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THE GNMA FUND INVESTMENT ACCUMULATION PROGRAM, INC.
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS:
<S> <C>
Investments at Value (Identified Cost $190,313,208) (Note 1a)................................ $ 194,689,077
Cash......................................................................................... 4,872,696
Interest Receivable.......................................................................... 1,153,026
Other........................................................................................ 3,517
-----------------
Total Assets.............................................................................. 200,718,316
-----------------
LIABILITIES:
Payable for Capital Stock Reacquired......................................................... 152,498
Accounts Payable and Accrued Expenses........................................................ 138,005
Payable to Administrators (Note 2)........................................................... 34,085
-----------------
Total Liabilities......................................................................... 324,588
-----------------
NET ASSETS (Equivalent to $21.09 net asset value per share on 9,501,665
shares of capital stock outstanding) (Note 4)............................................. $ 200,393,728
-----------------
-----------------
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
- --------------------------------------------------------------------------------
THE GNMA FUND INVESTMENT ACCUMULATION PROGRAM, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET INVESTMENT INCOME:
INCOME:
<S> <C>
Interest Income and Premium Amortization (Note 1c).......................... $ 13,763,429
EXPENSES:
Custodian, Transfer and Dividend Disbursing Agent Fees...................... $ 524,211
Administration Fee (Note 2)................................................. 401,721
Printing and Mailing........................................................ 121,796
Professional Fees........................................................... 61,234
Other....................................................................... 12,774
Directors' Fees & Expenses.................................................. 11,000 1,132,736
--------------- ----------------
Net Investment Income.................................................... 12,630,693
UNREALIZED GAIN ON INVESTMENTS:
Unrealized Appreciation of Investments:
Beginning of Year........................................................ 3,460,770
End of Year.............................................................. 4,375,869
---------------
Increase in Unrealized Appreciation......................................... 915,099
----------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.......................... $ 13,545,792
----------------
----------------
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
- --------------------------------------------------------------------------------
THE GNMA FUND INVESTMENT ACCUMULATION PROGRAM, INC.
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
-------------------- --------------------
INCREASE/(DECREASE) IN NET ASSETS:
OPERATIONS:
<S> <C> <C>
Net Investment Income................................................ $ 12,630,693 $ 13,634,703
Net Equalization (Debits) included in the Price of Capital Stock Sold
and Reacquired (Note 1d)............................................. (93,690) (146,110)
Increase in Unrealized Appreciation of Investments................... 915,099 4,115,821
-------------------- --------------------
Net Increase in Net Assets Derived from Operations................... 13,452,102 17,604,414
-------------------- --------------------
Dividends to Shareholders (Note 5)................................... (12,869,683) (13,476,029)
-------------------- --------------------
Capital Share Transactions (Exclusive of Net Equalization Debits
Allocated to Undistributed Net Investment Income) (Note 4):
Net Proceeds from Sale of Capital Stock.............................. 17,497,431 16,808,559
Net Asset Value of Shares Issued to Shareholders in Reinvestment of
Dividends.......................................................... 12,490,344 12,264,828
-------------------- --------------------
29,987,775 29,073,387
Cost of Capital Stock Reacquired..................................... (31,966,135) (39,180,934)
-------------------- --------------------
Decrease in Net Assets from Capital Stock Transactions............... (1,978,360) (10,107,547)
-------------------- --------------------
Total Decrease in Net Assets......................................... (1,395,940) (5,979,162)
NET ASSETS:
Beginning of Year.................................................... 201,789,668 207,768,830
-------------------- --------------------
End of Year (including undistributed net investment income of
$687,441 in 1998 and $1,020,122 in 1997 and accumulated realized
capital losses of $64,369 in 1998 and $83,332 in 1997)............. $ 200,393,728 $ 201,789,668
-------------------- --------------------
-------------------- --------------------
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
- --------------------------------------------------------------------------------
THE GNMA FUND INVESTMENT ACCUMULATION PROGRAM, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
SELECTED DATA FOR A SHARE OF CAPITAL STOCK
OUTSTANDING THROUGHOUT EACH YEAR:
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year.................. $ 21.03 $ 20.59 $ 21.10 $ 19.24 $ 21.39
------------ ------------ ------------ ------------ ------------
Income From Investment Operations
Net Investment Income............................... 1.33 1.40 1.41 1.41 1.43
Net Realized and Unrealized Gain (Loss) on
Investments....................................... 0.09 0.43 (0.53) 1.87 (2.14)
------------ ------------ ------------ ------------ ------------
Total From Investment Operations.................. 1.42 1.83 0.88 3.28 (0.71)
------------ ------------ ------------ ------------ ------------
Dividend Distributions from Net Investment Income... (1.36) (1.39) (1.39) (1.42) (1.44)
------------ ------------ ------------ ------------ ------------
Net Asset Value, End of Year........................ $ 21.09 $ 21.03 $ 20.59 $ 21.10 $ 19.24
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
TOTAL INVESTMENT RETURN............................. 7.02% 9.16% 4.39% 17.54% (3.36%)
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
SIGNIFICANT RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year
(in thousands).................................... $ 200,394 $ 201,790 $ 207,769 $ 220,198 $ 204,032
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Operating Expenses to Average Net Assets............ 0.56% 0.57% 0.57% 0.58% 0.59%
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Net Investment Income to Average Net Assets......... 6.29% 6.74% 6.84% 6.92% 7.12%
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Portfolio Turnover Rate............................. 0% 0% 0% 0% 0%
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
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THE GNMA FUND INVESTMENT ACCUMULATION PROGRAM, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The GNMA Fund Investment Accumulation Program, Inc. (the 'Program') was
incorporated under Maryland law on November 17, 1977 and commenced operations on
April 24, 1978. The Program is registered under the Investment Company Act of
1940 as an open-end management company.
The following is a summary of significant accounting policies consistently
followed by the Program.
(a) Investments are valued by the Program's pricing
agent, Interactive Data Services, Inc. These
values are not necessarily bids or actual last
sale prices but are estimates of the prices at
which the pricing agent believes the Program
could sell such investment securities.
(b) It is the Program's policy to comply with the
requirements of the Internal Revenue Code
applicable to regulated investment companies and
to distribute all of its income to its
shareholders. Therefore, no Federal income tax
provision is required.
(c) Security transactions are recorded on the date
the securities are purchased or sold (the trade
date). Interest income including amortization of
discount less premium amortization is recorded as
earned. Dividend distributions to shareholders
are recorded on the ex-dividend date.
(d) The Program follows the accounting practice known
as 'Equalization' by which a portion of the
proceeds from sales and costs of reacquiring
capital shares, equivalent on a per share basis
to the amount of distributable net investment
income on the date of the transaction, is
credited or charged to undistributed net
investment income. As a result, undistributed net
investment income per share is unaffected by
sales or reacquisitions of capital stock.
(e) Prepaid registration fees are charged to expense
as the related shares are issued or over the
period of registration, whichever is applicable.
2. ADMINISTRATION AGREEMENT
The Program has entered into an Administration Agreement with Merrill Lynch,
Pierce, Fenner & Smith, Incorporated ('MLPF&S'), Prudential Securities Inc.,
Dean Witter Reynolds, Inc. and Salomon Smith Barney Inc. (the 'Administrators'),
whereby the Administrators perform certain administrative duties for the
Program. For these services, the Administrators receive a monthly fee from the
Program equal to 0.2% on an annual basis of the Program's average daily net
assets and have agreed to reimburse the Program to the extent the Program's
expenses (excluding interest, taxes, brokerage fees and extraordinary items such
as litigation costs) exceed the lesser of (i) 1 1/2% of the first $30 million of
the average daily net assets of the Program and 1% of the average daily net
assets in excess thereof, or (ii) 25% of the Program's investment income.
Certain officers and/or directors of the Program are officers of MLPF&S.
3. PURCHASES AND SALES OF SECURITIES
During the year ended December 31, 1998 purchases, excluding short-term
securities, totalled $36,805,000. There were no sales of securities.
9
<PAGE>
- --------------------------------------------------------------------------------
THE GNMA FUND INVESTMENT ACCUMULATION PROGRAM, INC.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
- --------------------------------------------------------------------------------
4. CAPITAL SHARES
The Articles of Incorporation authorize the Program to issue 25,000,000 shares
of a single class. At December 31, 1998, paid-in capital amounted to
$195,394,786. Transactions in shares were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Shares sold...................................................................... 834,609 815,853
Shares issued to shareholders in reinvestment of dividends....................... 595,789 595,291
-------------- --------------
Total............................................................................ 1,430,398 1,411,144
Shares reacquired................................................................ (1,523,507) (1,906,541)
-------------- --------------
Net decrease..................................................................... (93,109) (495,397)
-------------- --------------
-------------- --------------
</TABLE>
5. DIVIDENDS AND DISTRIBUTIONS
The Program distributes, monthly, substantially all of its net investment
income. Net realized capital gains, if any, are distributed annually. At
December 31, 1998, the Program had a capital loss carryforward of approximately
$65,000 ($9,000 in 1999 and $56,000 in 2000), which will be available to offset
a like amount of future taxable gains.
6. CASH OVERDRAFT
Under the terms of an agreement between the Program Agent ('Agent') and the
Program, overdrafts by the Program are deemed to be loans by the Agent payable
on demand and bearing interest at the GNMA Repurchase Agreement Rate. Such
overdrafts are secured by a lien on the Program's property in the Agent's
possession or control.
The Program did not have any overdrafts outstanding as of December 31, 1998.
10
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS,
THE GNMA FUND INVESTMENT ACCUMULATION PROGRAM, INC.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of The GNMA Fund Investment Accumulation
Program, Inc. as of December 31, 1998, the related statements of operations for
the year then ended and changes in net assets for each of the years in the
two-year period then ended, and the financial highlights for each of the years
in the five-year period then ended. These financial statements and the financial
highlights are the responsibility of the Program's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1998 by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of The GNMA Fund
Investment Accumulation Program, Inc. as of December 31, 1998, the results of
its operations, the changes in its net assets, and the financial highlights for
the respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 22, 1999
11
